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Moody's downgrades Banca Monte dei Paschi di Siena's deposit rating to B2 from Ba2
Moody's downgrades Banca Monte dei Paschi di Siena's deposit rating to B2 from Ba2
Rating Action: Moody's downgrades Banca Monte dei Paschi di Siena's deposit rating to B2 from Ba2
Global Credit Research - 09 May 2013
MPS Capital Services also downgraded to B2
London, 09 May 2013 -- Moody's has today downgraded Banca Monte dei Paschi di Siena S.p.A (MPS)'s long-term debt and deposit ratings to B2 from Ba2. At the same time, the standalone bank financial strength rating (BFSR) of E was remapped to a standalone baseline credit assessment (BCA) of caa3 from caa1. All ratings on the bank's long-term debt instruments and programmes are affected by this action, including all the ratings of MPS Capital Services (see below for further details). The outlook on the long-term deposit ratings is negative, reflecting primarily the pressures from the currently challenging operating environment in Italy on MPS's credit profile. The standalone BFSR has no outlook.
RATINGS RATIONALE
Moody's said that the downgrade of the standalone BCA to caa3 from caa1 reflects increasing pressure on MPS's (i) profitability, (ii) asset quality and (iii) capitalisation, despite the Eur4.1 billion capital injection from the Italian government received in February 2013(1).
Firstly, with regard to profitability, MPS reported a net loss for 2012 of Eur3.2billion (Eur1.6 billion when adjusted to exclude an additional goodwill impairment of Eur1.5 billion). This was significantly affected by loan loss provisions of Eur2.7 billion -- more than double the amount booked in 2011. In its business plan the bank targets a pre-tax profit of more than Eur1.2 billion by 2015 mainly via (i) aggressive cost cutting which aims to reduce operating expenses by more than Eur400 million, equivalent to almost 10% of total operating costs, and (ii) a significant expected reduction of loan loss provisioning requirements in 2015. With regards to the bank's cost cutting plan, Moody's cautions that the cost reductions, while challenging but potentially achievable, could be offset to some degree by lower revenues due to the bank's deleveraging objectives, as well as due to the economic headwinds and low interest rate environment facing the bank. In this context, Moody's noted that it had recently revised downward its Italian GDP growth projections for 2013 from -1.0% to -1.8%; for 2014, the growth projections are limited to 0.2%.
Secondly, with regard to asset quality, Moody's notes that the ongoing recessionary environment is also a key challenge which could make it difficult for MPS to reduce its cost of credit in line with its business plan to 77 basis points in 2015, compared to 188bp in 2012 (the bank has not provided specific guidance for 2013 and 2014), assuming that the bank doesn't further lower its provisioning levels in relation to problem loans. According to Moody's calculations, problem loans now stand at 16% of gross loans (significantly above the system average of 10.6%(2)), while the coverage of problem loans with provisions has declined to 53% which, though above the system average, is below the pre-crisis level of 60% in 2007. Moody's believes that significant macroeconomic pressures will cause problem loans to increase further as a percentage of gross loans in 2013 and 2014.
Thirdly, regarding capitalisation, Moody's says that, as a result of the expectation of high loan loss charges, the bank is likely to be challenged to strengthen its capital adequacy through internal profit generation. In December 2012 MPS's pro-forma core tier 1 ratio stood at 11.3%, including a substantial Eur4.1 billion of capital from the Italian government (so-called Monti bonds), which provide 440 basis point of core tier 1 capital. This is only slightly above the average for larger Italian banks, reported by the Bank of Italy to be 10.5% (3). Moody's cautions that these Monti bonds include significant step-up clauses on interest (which could be paid with new shares issued at market price in case of losses) and principal, which will make these instruments increasingly expensive to hold. In this context, Moody's notes that MPS is planning to repay these bonds. Moody's also notes that this government capital injection was only just sufficient to cover the prior capital shortfall below the 9% Core Tier 1 ratio according to EBA stress tests and capital definitions and additional extraordinary losses on structured transactions incurred in 2012 after the EBA exercise.
Moody's says that it believes that there is uncertainty regarding the feasibility of MPS's plans to redeem the Monti bonds given questions around internal capital generation and uncertain prospects for external capital raises beyond the Eur1 billion planned for 2014. According to Moody's adverse scenario, taking into account (i) the low core profitability of the bank, (ii) the Monti bonds in the capital structure of MPS, and (iii) the limited prospects for new capital from the bank's other non-government shareholders, Moody's is concerned that the risk of burden sharing with creditors in order to ensure its adequate capitalisation has risen and would be significant under an adverse scenario.
The downgrade of the deposit rating mainly reflects the remapping of the BCA to caa3. The downgrade of the deposit rating however also takes into account the Italian government's increasing Debt-to-GDP ratio, as well as growing political pressure at the national and international level to protect a government's financial flexibility from the (contingent) liabilities stemming from its banking system. As a result the uplift for the debt and deposit rating, from the standalone BCA, has been reduced to four notches, from five previously, due to Moody's expectation of reduced systemic support.
The outlook on MPS's long-term deposit rating is negative, to reflect the challenges posed by the weak operating environment; the negative outlook is also in line with the outlook on the Italian sovereign and with most Italian banks.
WHAT COULD MOVE THE RATINGS UP/DOWN
There is no upside pressure on the ratings at present in view of the negative outlook. However the BCA could remain at caa3 if the bank's problem loans stabilise over 2013, and if the bank will be able to provide an achievable plan to repay its government bonds within a limited timeframe. The deposit rating of B2 could be confirmed if, in addition to the BCA remaining at caa3, our assessment of the probability of systemic support remains high throughout and beyond the current challenges for the bank.
Conversely, the standalone BCA could be lowered if asset quality deteriorates further, with problem loans approaching 20% of total gross loans. The B2 could also be downgraded as a result of a lowering of the BCA, or in the event that willingness and/or ability of the Italian government to support its banking system decreases over the next 12 months.
MPS CAPITAL SERVICES
Moody's has also concluded the review on MPS's corporate and investment banking subsidiary, MPS Capital services, which remains fully integrated with and closely correlated to the parent. The ratings of MPS Capital Services follow the ratings of MPS.
LIST OF AFFECTED RATINGS
1. Banca Monte dei Paschi di Siena (MPS) and its fully backed vehicles MPS Capital Trust I and Monte Paschi Ireland Limited
- Senior unsecured debt and EMTN, and bank deposits: B2 with negative outlook; (P)B2
- Subordinate debt and EMTN: Ca with negative outlook; (P)Ca
- Tier III EMTN: (P)Ca
- Junior subordinate and EMTN: C(hyb) with no outlook; (P)C
- Preferred stock: C(hyb) with no outlook
2. MPS Capital Services
- Long-term bank deposits: B2 with negative outlook
(1) Unless noted otherwise, data in this press release is sourced from company's reports, or Moody's Banking Financial Metrics.
(2) Source: Bank of Italy's 5th Financial Stability Report, published in April 2013. Moody's adjusts these numbers and only incorporates 30% of the "incagli" (watchlist) category.
(3) Source: Bank of Italy's 5th Financial Stability Report, published in April 2013.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology Name published in June 2012. Please see the Credit Policy page on Moody's - credit ratings, research, tools and analysis for the global capital markets for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on Moody's - credit ratings, research, tools and analysis for the global capital markets.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Please see Moody's - credit ratings, research, tools and analysis for the global capital markets for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on Moody's - credit ratings, research, tools and analysis for the global capital markets for additional regulatory disclosures for each credit rating.
Edoardo Calandro
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Banca Monte dei Paschi di Siena's deposit rating to B2 from Ba2
Rating Action: Moody's downgrades Banca Monte dei Paschi di Siena's deposit rating to B2 from Ba2
Global Credit Research - 09 May 2013
MPS Capital Services also downgraded to B2
London, 09 May 2013 -- Moody's has today downgraded Banca Monte dei Paschi di Siena S.p.A (MPS)'s long-term debt and deposit ratings to B2 from Ba2. At the same time, the standalone bank financial strength rating (BFSR) of E was remapped to a standalone baseline credit assessment (BCA) of caa3 from caa1. All ratings on the bank's long-term debt instruments and programmes are affected by this action, including all the ratings of MPS Capital Services (see below for further details). The outlook on the long-term deposit ratings is negative, reflecting primarily the pressures from the currently challenging operating environment in Italy on MPS's credit profile. The standalone BFSR has no outlook.
RATINGS RATIONALE
Moody's said that the downgrade of the standalone BCA to caa3 from caa1 reflects increasing pressure on MPS's (i) profitability, (ii) asset quality and (iii) capitalisation, despite the Eur4.1 billion capital injection from the Italian government received in February 2013(1).
Firstly, with regard to profitability, MPS reported a net loss for 2012 of Eur3.2billion (Eur1.6 billion when adjusted to exclude an additional goodwill impairment of Eur1.5 billion). This was significantly affected by loan loss provisions of Eur2.7 billion -- more than double the amount booked in 2011. In its business plan the bank targets a pre-tax profit of more than Eur1.2 billion by 2015 mainly via (i) aggressive cost cutting which aims to reduce operating expenses by more than Eur400 million, equivalent to almost 10% of total operating costs, and (ii) a significant expected reduction of loan loss provisioning requirements in 2015. With regards to the bank's cost cutting plan, Moody's cautions that the cost reductions, while challenging but potentially achievable, could be offset to some degree by lower revenues due to the bank's deleveraging objectives, as well as due to the economic headwinds and low interest rate environment facing the bank. In this context, Moody's noted that it had recently revised downward its Italian GDP growth projections for 2013 from -1.0% to -1.8%; for 2014, the growth projections are limited to 0.2%.
Secondly, with regard to asset quality, Moody's notes that the ongoing recessionary environment is also a key challenge which could make it difficult for MPS to reduce its cost of credit in line with its business plan to 77 basis points in 2015, compared to 188bp in 2012 (the bank has not provided specific guidance for 2013 and 2014), assuming that the bank doesn't further lower its provisioning levels in relation to problem loans. According to Moody's calculations, problem loans now stand at 16% of gross loans (significantly above the system average of 10.6%(2)), while the coverage of problem loans with provisions has declined to 53% which, though above the system average, is below the pre-crisis level of 60% in 2007. Moody's believes that significant macroeconomic pressures will cause problem loans to increase further as a percentage of gross loans in 2013 and 2014.
Thirdly, regarding capitalisation, Moody's says that, as a result of the expectation of high loan loss charges, the bank is likely to be challenged to strengthen its capital adequacy through internal profit generation. In December 2012 MPS's pro-forma core tier 1 ratio stood at 11.3%, including a substantial Eur4.1 billion of capital from the Italian government (so-called Monti bonds), which provide 440 basis point of core tier 1 capital. This is only slightly above the average for larger Italian banks, reported by the Bank of Italy to be 10.5% (3). Moody's cautions that these Monti bonds include significant step-up clauses on interest (which could be paid with new shares issued at market price in case of losses) and principal, which will make these instruments increasingly expensive to hold. In this context, Moody's notes that MPS is planning to repay these bonds. Moody's also notes that this government capital injection was only just sufficient to cover the prior capital shortfall below the 9% Core Tier 1 ratio according to EBA stress tests and capital definitions and additional extraordinary losses on structured transactions incurred in 2012 after the EBA exercise.
Moody's says that it believes that there is uncertainty regarding the feasibility of MPS's plans to redeem the Monti bonds given questions around internal capital generation and uncertain prospects for external capital raises beyond the Eur1 billion planned for 2014. According to Moody's adverse scenario, taking into account (i) the low core profitability of the bank, (ii) the Monti bonds in the capital structure of MPS, and (iii) the limited prospects for new capital from the bank's other non-government shareholders, Moody's is concerned that the risk of burden sharing with creditors in order to ensure its adequate capitalisation has risen and would be significant under an adverse scenario.
The downgrade of the deposit rating mainly reflects the remapping of the BCA to caa3. The downgrade of the deposit rating however also takes into account the Italian government's increasing Debt-to-GDP ratio, as well as growing political pressure at the national and international level to protect a government's financial flexibility from the (contingent) liabilities stemming from its banking system. As a result the uplift for the debt and deposit rating, from the standalone BCA, has been reduced to four notches, from five previously, due to Moody's expectation of reduced systemic support.
The outlook on MPS's long-term deposit rating is negative, to reflect the challenges posed by the weak operating environment; the negative outlook is also in line with the outlook on the Italian sovereign and with most Italian banks.
WHAT COULD MOVE THE RATINGS UP/DOWN
There is no upside pressure on the ratings at present in view of the negative outlook. However the BCA could remain at caa3 if the bank's problem loans stabilise over 2013, and if the bank will be able to provide an achievable plan to repay its government bonds within a limited timeframe. The deposit rating of B2 could be confirmed if, in addition to the BCA remaining at caa3, our assessment of the probability of systemic support remains high throughout and beyond the current challenges for the bank.
Conversely, the standalone BCA could be lowered if asset quality deteriorates further, with problem loans approaching 20% of total gross loans. The B2 could also be downgraded as a result of a lowering of the BCA, or in the event that willingness and/or ability of the Italian government to support its banking system decreases over the next 12 months.
MPS CAPITAL SERVICES
Moody's has also concluded the review on MPS's corporate and investment banking subsidiary, MPS Capital services, which remains fully integrated with and closely correlated to the parent. The ratings of MPS Capital Services follow the ratings of MPS.
LIST OF AFFECTED RATINGS
1. Banca Monte dei Paschi di Siena (MPS) and its fully backed vehicles MPS Capital Trust I and Monte Paschi Ireland Limited
- Senior unsecured debt and EMTN, and bank deposits: B2 with negative outlook; (P)B2
- Subordinate debt and EMTN: Ca with negative outlook; (P)Ca
- Tier III EMTN: (P)Ca
- Junior subordinate and EMTN: C(hyb) with no outlook; (P)C
- Preferred stock: C(hyb) with no outlook
2. MPS Capital Services
- Long-term bank deposits: B2 with negative outlook
(1) Unless noted otherwise, data in this press release is sourced from company's reports, or Moody's Banking Financial Metrics.
(2) Source: Bank of Italy's 5th Financial Stability Report, published in April 2013. Moody's adjusts these numbers and only incorporates 30% of the "incagli" (watchlist) category.
(3) Source: Bank of Italy's 5th Financial Stability Report, published in April 2013.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology Name published in June 2012. Please see the Credit Policy page on Moody's - credit ratings, research, tools and analysis for the global capital markets for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on Moody's - credit ratings, research, tools and analysis for the global capital markets.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Please see Moody's - credit ratings, research, tools and analysis for the global capital markets for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on Moody's - credit ratings, research, tools and analysis for the global capital markets for additional regulatory disclosures for each credit rating.
Edoardo Calandro
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
